I will share some of the things I am well familiar with as a Credit Risk Manager at Citibank. I manage credit card portfolios, not mortgages and lines of credit, but the approaches are very standard in the industry.
As a trend, delinquencies in Canada are on a rise, as recent layoffs and cancellation of jobs in Ontario and Quebec, and significant cooling in the West, plus inflation left people with all the debt they accumulated during the good times and less income overall to pay for it. Thus people start missing payments. Bankruptcies are also on a rise year over year. So Risk teams are now tasked with limiting the exposure of the bank to potential losses.
For existing unsecured LOC products banks might increase the interest they charge to offset incremental losses, or do a popular exercise called Credit Limit Decrease (CLD). In this exercise they try to tackle accounts which show the potential of turning bad. Who typically falls into this High Risk category? Those with current or recent delinquency on their LOC, credit card, or even on other financial institution`s LOC or credit card. So do your utmost to NOT go past due on ANY of your credit products.
Next are accounts with high utilization (especially over 75%). I always recommend NOT to utilize your LOC that high. Example: if your Line of Credit has a limit of $10,000 - try not to have a balance which exceeds about $7,000. It is a red flag!
Of course, your FICO score (Beacon or Empirica) and Bankruptcy score (BNI or Horizon) usually are a factor. These scores are sensitive to delinquency, high utilization, many credit inquiries.
So watch out if you are running high balances, opening too many credit cards, loans, LOCs, shopping around for credit (inquiries), not paying bills on time! You are more likely to get a letter from your bank informing you that they lowered your credit limit. As a typical industry practice, though, they will not reduce your limit below your current credit balance. You have to be in a really poor standing (90+ days past due) for them to call you and say "Your account is closed. Pay up!"
Secured lines of credit are based on the equity in your house, so to what I said above add a factor of what area you live in. If house values start going down substantially, do not be surprised if the bank chooses to reduce your credit limit, or in some cases close this line down.
For new unsecured lines of credit, expect FICO score requirement to go up. Anybody serious about investments should avoid letting their FICO score slide below 680. Again high balances (a healthy balance is around 30%), late payments, too many new credit cards, too many inquiries will pull you down. TDSR is also a consideration. Don Campbell explains this ratio very well in his book and in Quickstart program, so read up and ensure that the sum of your monthly minimum payments as a percentage of your monthly income do not come close to the danger zone of 40%.
I hope this informaton will be useful. I only touched on LOC products, but same principles apply to mortgages. I think it is safe to assume that tightening will be happening in mortgage underwriting strategies as well, so as Don pointed out - sticking to the sound practices ("the Binder") and making bank`s decision easier is a the approach to take.
Please feel free to ask questions.
Oleg Pereslegin
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